Reinsurers’ ties with direct writers are changing
Life reinsurers continue to regroup and rethink retention levels and pricing, according to rating agency analysts.
“Steady demand combined with reduced supply have not only increased pricing power but have also greatly improved the terms by which the game is played,” writes Rodney Clark, a credit analyst with Standard & Poor’s Corp, New York.
In the report, titled “Consolidation Breeds Strength for a Stable Life Reinsurance Sector Outlook,” two approaches to the shrinking market are outlined: “playing hardball with clients” and raising prices, or “grabbing additional share.”
The latter, according to the report, is illustrated by the acquisition in late 2004 of ING Groep N.V.’s individual life reinsurance business by Scottish Re Group, Ltd., Hamilton, Bermuda.
The “little fish eats big fish acquisition” of the business from the U.S. unit of ING, based in Amsterdam, was a springboard that pushed Scottish Re into the No. 2 spot among reinsurers with about a 15% market share as measured by insurance in force.
Illustrating the first approach, Swiss Re, ranked No. 1 with a nearly 30% share, the report continues, took a different tack and “retrenched by taking full advantage of its market heft.” In 2004 the company, based in Zurich and New York, conducted reviews of its clients “in most cases raising prices and in some cases refusing to re-bid at all.”
One reason for this strategy, according to the S&P report, is the strength of margins in its property-casualty reinsurance business, which makes it possible “to accept stunted growth in life [business] for the sake of greater profitability.”
Reinsurers also are tightening underwriting standards for direct writers that companies must adhere to or risk arbitration or refusal to pay a claim, the report says.
Clark says equilibrium is being reached in which direct writers will consider taking on more risk rather than pay for reinsurance. In fact, he says, a few direct writers already are buying less reinsurance.
Part of the reason for the tighter underwriting criteria, according to Clark, is that “life insurers had become more like asset managers and are not keeping risk. We are seeing the pendulum swing.”
In some cases, he continues, direct writers are starting to restructure their programs to retain more of the risk.
And, to some extent, new entrants such as Wilton Re, Greenwich, Conn., ACE Tempest Life Reinsurance Ltd., and Max Re Ltd., both in Hamilton, Bermuda, could provide some relief for direct writers, according to the report.
Securitizations and other capital market transactions may also become more common, according to Clark.
Although securitizations are expensive for companies that are the first to use them, prices come down over time as the market becomes more comfortable with risk and modeling of specific risks, he adds. However, these transactions will be completed by the top 20 large primary writers because scale is needed to do them, Clark says.